Some Comments on the Validity of EOQ Formula under Inflationary Conditions

Abstract

In an earlier issue of Decision Sciences. Jesse. Mitra. and Cox 111 aamined the impact of inflationary conditions on the economic order quantity OQ) formula. Specifically. the authors analyzed the effect of inflation on order quantity decisions by means of a model that taka into account both inflationary trends and time discounting (over an infinite time horizon). In their analysis, the authors utilized two models: Currentdollars model and Constant-dollars model. These models were derived, of course. by setting up a total cost equation in the usual manner then r i d i n g the optimum order quantity that minimizes the total cost. Jesse, Mitra. and Cox [I ] found that EOQ is approximately the same u n d a both conditions; with or without inflation. However. we disagree with the conclusion drawn by[ 2 ] and show that EOQ will be different under inflationary conditions, provided that the inflationary conditions are properly accounted for in the formulation of the total cost model. Subject Ams: Decislon A~l y s i c and Inventory Management. nrrAL COST MODELSince the total cost equation is the sole initiator of computing economic order quantity (EOQ). it must be formulated in a manner that takes into account the prescribed inflationary conditions. The following are the annual total cost (TC) equations, with and without inflation. Without Inflation TC= (R/Q)SI + (QI2)Cik + RCI With Inflationwhere R =demand per year, Q =economic order quantity, S , =setup cost at the beginning, g C , =cost per unit at the beginning, f =monthly increase in cost per unit, u = R/Q=number of setups per year, b = I2/a, k =carrying cost per year as a fraction of C. s, =si-l +g6, c, =C,-,+fb, = monthly increase in setup costs, 206

Production lot sizing with the reworking of imperfect quality items produced

“…Yanasse (1990) examined the anticipated price increase in a standard EOQ. Mehra et al (1991) analysed the eå ect of in¯ation on order quantity decisions by means of a model that takes into account in¯ationary trends and time discounting over an in® nite time horizon. Tersine and Barman (1991) studied the problem of scheduling replenishment orders under the classical EOQ model when both quantity and freight rate discounts are encountered.…”

A finite production model with random defective rate and shortages allowed and backordered

“…Cheng [3] formulated inventory as a geometric program and obtained closed-form optimal solutions for an EOQ with demand-dependent unit production cost and imperfect production processes. Mehra et al [6] commented on the validity of EOQ formula under inflationary condition. Tersine and Barman [17] studied lot size optimization for an EOQ model with both quantity and freight rate discounts.…”

“A simulation analysis of ordering policies under inflationary conditions”: A critique

“…This is inconsistent with their analysis which inferred that order sizes should increase under inflationary conditions. Mehra and Amini[1 ] used a discrete formulation identical to one in Mehra et al [2] with exactly the same variable names, equations and presentation format. A reference to the earlier work was needed since roughly 40 per cent of Mehra and Amini′s article was taken directly from it.…”

“…The standard EOQ can be multiplied by a factor: (1/(1 – i/K)) (1/2) where “ K ” is the holding rate and “ i ” the inflation rate to yield an adjusted order quantity. This approach may be compared to Mehra and Amini[1] by using an example from Mehra et al [2]. The set‐up costs are US$4,000, the holding costs are 30 per cent, the initial unit cost is US$40, with a demand for 12,000 units per year and an inflation rate of 12 per cent.…”

“…The difference in quantities is about 1 per cent. The difference in costs is practically invisible, US$56,554 for Silver and Peterson[ 3] and US$56,553 for Mehra et al [2].…”